The younger generation as estate owners and trustees

When the founding father of Dubai – Sheikh Rashid – was asked about the future of Dubai he said: “My grandfather rode a camel, my father rode a camel, I drive a Mercedes, my son drives a Land Rover, his son will drive a Land Rover, but his son will ride a camel…

South Africa’s National Youth Commission Act of 1996 defines ‘youth’ as people from ages 14 – 35 years. The motivation for the age limit of 35 years has not yet changed due to the need to fully address historical imbalances in the country and is consistent with the one contained in the African Youth Charter, which is between 15 - 35 years (African Union Commission, 2006). This group constitutes more than a third of the population (34.7%).

Considering the age bracket of youth, Millennials (from mid 20’s to 40) in the US only controls 7% of the wealth. To put this share of control into context, at a similar age the Baby Boomers controlled 21% of the wealth. Only 11% Millennials are found to have a ‘relatively high level’ of financial literacy, whereas 28% were rated ‘very low”. This, together with the reality that the greatest wealth transfer ever of $30-trillion (R400-trillion) over the next two decades – mainly from the Baby Boomers who control 50% of the wealth for the past 20 years – will take place to the younger generations, will impact the world of wealth management, preservation (and use). The question remains – is this generation financially educated and suited to handle such a ‘gigantic’ wealth transfer?
 
If this is an indication of what is happening worldwide, then the words of Sheik Rashid should serve as a warning. Millennials, who is the largest, most educated, highest earning, but the poorest group, is characterised by debt-fuelled consumerism and as a result of job-hopping have not sufficiently made provision for retirement, as they cash in their retirement savings when moving jobs. The worldwide notion of ‘instant gratification’ seems to be embraced wider by the younger generation from the above statistics. All these factors have a material impact on the preservation, management and disposal of wealth in the future, which will also have an impact on wealth creation and preservation vehicles such as trusts. The fact that the different generations think differently about wealth is clear.

The purpose of the trust
From the above statistics, it appears if there may be more reliance in future on trust funds for the maintenance of trust beneficiaries, compared to a ‘saving’ mentality of the baby boomer generation who still controls half of the wealth and who are believed to generate as much as 70% of the disposable income in the US. This generation, in South Africa, was in most instances the founders of the typical family trusts – a conservative generation.

Often in South Africa estate owners were advised that they could not be the founder, a trustee and a beneficiary of a trust and often ended up only acting as founder and/or trustee on trusts created by them. This creates an issue in the event of them planning to utilise trust funds in later years for their maintenance. It is important to remember that one can only benefit from a trust if you are a beneficiary. In the US about 19% of the Baby Boomers are of the view that they do not want their children to inherit. If you are not a beneficiary, the only way you can get money from the trust is if you receive a donation from the trust (if the trust deed allows for that) or if your children (as beneficiaries) receive the money and then give it to you. However, in both instances it will attract Donations Tax of between 20 and 25%. Estate planners should review their trust deeds and ensure that it caters for all intended purposes. 

The ‘new generation trustee’
The current ‘Baby Boomer board of trustees’ seems to be more conservative in handling money compared to the younger generation trustees who are typically replacing the exiting trustees. In many instances the founder would be one of the first trustees, who would have worked hard to accumulate the wealth in the trust to protect and preserve it for their families and their future generations. Very little distributions would normally be made out of the trust and in stead wealth would be accumulated and preserved.

Generally speaking, founders wish to introduce their children as trustees of the trust at some point – either while they are still alive or as replacement trustees upon their demise. Considering the generation gap, this may cause conflict between trustees in terms of how assets should be managed in the trust. Younger generations are less willing to invest in traditional investments such as shares and bonds and rather prefer to invest in higher risk assets such as silver, gold, crypto, etc. A number of primary residences typically occupied by the founder and their wife held by the trust will be disposed of and either alternative investments will have to be considered, or the ‘new generation trustee’ may rather want to spend that. Careful consideration should therefore be given to the planning of follow-up trustees in the trust deed to ensure that the founder’s objectives are met as set out in the trust instrument. It is also advisable to include future follow-up family trustees in trust deliberations from a young age for them to appreciate the founder’s sentiment, as well as  the trust’s objective.

Multiple bloodlines
It has been found that most trusts are deregistered after two to three generations of being handed down. This typically happens when siblings each want to go their own way after conflict develops amongst them and the patriarch or matriarch (the founder) is no longer around. With each generation, the pool of beneficiaries is getting larger, all with their own objectives, making it increasingly difficult to manage the trust, often leading to conflict and the trust being terminated. The estate planner should be aware of this and plan for this – such as making provision in the trust deed for representation on the board of trustees for each of their bloodlines and for the proper creation of sub-trusts for each sibling. With the younger generation’s different outlook the founder’s generational wealth preservation objective may not be reached.
 
Youth as estate owners
Several of our government programmes support new youth-owned businesses. Therefore, the number of youth-owned businesses is increasing. It is a known fact that more than 90% of business owners close their doors within five to seven years of opening them, with projected bankruptcies for 2021 at 220 companies per month and 240 companies per month for 2022. It is important for new business owners to structure their affairs correctly to shield their personal assets from any business failure. A trust may very well be the solution. Given the harsh tax treatment of paid up assets being moved into a trust, it may be good advice to create a trust before any material wealth is created.